IFRS and GAAP Accounting Quiz: Test

CCC=Days of inventory on hand + days of sales outstanding - number of days of payables

As a whole, a shorter CCC means greater liquidity.

Under IFRS (International Financial Reporting Standards), the value of property and equipment and identifiable intangible assets can be revalued upward. This means that if the fair value of these assets increases, the company can choose to increase their carrying value on the balance sheet. On the other hand, under US GAAP (Generally Accepted Accounting Principles), revaluation of property and equipment and identifiable intangible assets is generally not allowed. This means that the carrying value of these assets will remain at their original cost, unless there is an impairment that requires a write-down.

Remember, they are only allowed under US GAAP, but even still, they are not expected to continue in future periods. It should be a one time thing.

The strip is a zero-coupon security, so it has no cash flows to reinvest and therefore no reinvestment risk.

US GAAP allows upward revaluations and any resulting effects on deferred tax are recognized in equity, while IFRS prohibits upward revaluations. This means that under US GAAP, if there is an increase in the value of an asset, it can be revalued upwards and any resulting effects on deferred tax will be recognized in equity. However, under IFRS, upward revaluations are not allowed, so any increase in the value of an asset will not impact the deferred tax and will not be recognized in equity.

IFRS and GAAP are sets of actual accounting standards. SEC and FSA (Financial Services Authority, basically the UK's SEC) are regulatory authorities.

The strip is a zero-coupon security, so it has no cash flows to reinvest and therefore no reinvestment risk.

For example, when an asset is leased both IFRS and US GAAP require the lessee to treat it as a finance lease if most of the ownership is being absorbed by the lessee. However, since US GAAP has a rules-based approach, there are specific criteria given to help determine this. IFRS is more subjective.

Under IFRS, assets may be revalued upward to fair value. Gains reversing previous writedowns are reported on the income statement, and any excess gains are taken as an adjustment to equity in an account called REVALUATION SURPLUS.

Under US GAAP, long lived assets cannot be revalued upward, except that held-for-sale assets can be revalued upward to the extent of previous impairment writedowns.

these are all PARAMETRIC tests and make assumptions about the distribution.

Held-for-trading securities are reported on the balance sheet at FAIR VALUE and any unrealized gains and losses are recognized in the income statement.

IFRS DOES NOT ALLOW EXTRAORDINARY ITEMS Remember that Extraordinary Items (both unusual and infrequent) are reported below income from continuing operations, net of tax.

Under IFRS (International Financial Reporting Standards), the concept of extraordinary items has been eliminated. Extraordinary items refer to events or transactions that are both unusual and infrequent, and their inclusion in financial statements could distort the overall financial performance of a company. On the other hand, US GAAP (Generally Accepted Accounting Principles) still allows for the recognition of extraordinary items. This difference in treatment between IFRS and US GAAP regarding extraordinary items is why the statement "IFRS does not allow extraordinary items but US GAAP does" is true.

IFRS requires users to consider the framework in the absence of a specific standard. This means that when there is no specific standard applicable to a particular situation, users of IFRS should refer to the overall framework to make accounting judgments and decisions. US GAAP, on the other hand, does not have a similar requirement. Therefore, the correct answer is IFRS only.

Under US GAAP, dividends received are OPERATING cash flows.

Don't assume that just because sales or profit increased that it was a result of increased leverage.

Think of it like this, convexity accounts for the error in the estimated change in a bond's price based on duration.

Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system. Provided the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean there are no errors in a company's accounting system. For example, transactions classified improperly or those simply missing from the system could still be material accounting errors that would not be detected by the trial balance procedure.

Companies reporting under standards other than US GAAP that trade in US markets must reconcile their financial statements with US GAAP. This is because US markets require companies to provide financial information that is consistent and comparable, and US GAAP is the standard used in the United States. Reconciling their statements ensures that investors and stakeholders have access to accurate and reliable financial information.

US GAAP requires both research AND development costs to be expensed as incurred. IFRS requires research costs to be expensed but development costs can be capitalized.

Under IFRS, the asset is impaired if its worth less than what the firm could sell it for less selling costs or worth less than the PV of its expected future cash flows (value-in-use).

When the yield curve is flat, it means that the yields on different maturities of bonds are relatively similar. In this scenario, the zero-volatility spread (Z-spread) will equal the nominal spread. The Z-spread is the spread over the risk-free rate that compensates investors for the risk of a bond, while the nominal spread is the difference between the yield on a bond and the yield on a risk-free bond with the same maturity. When the yield curve is flat, the additional compensation for risk provided by the Z-spread is not necessary, so it equals the nominal spread.

Under IFRS (International Financial Reporting Standards), when an asset is impaired, it is written down to its recoverable amount. The recoverable amount refers to the higher of an asset's fair value less costs to sell and its value in use. This means that the asset is adjusted to its estimated future cash flows, taking into consideration the time value of money. Writing down the asset to its recoverable amount ensures that the carrying value of the asset on the balance sheet reflects its true economic value.

ROA=net income/assets

fixed asset turnover=revenue/average net fixed assets

Asset impairments result in losses in the income statement, but they have NO IMPACT ON CASH FLOW since there is no tax or other cash flow effects until the asset is actually disposed of.

Callable bonds have lower duration because they have an embedded call option, which allows the issuer to redeem the bond before its maturity date. This means that the bondholder may receive their principal earlier than expected, resulting in a shorter duration. As a result, callable bonds are less sensitive to changes in interest rates and have less price volatility compared to similar option-free bonds. Therefore, the statement is true.

payables turnover=purchases/average trade payables

remember that firms who are important to their suppliers will have a LOWER payables turnover because they don't need to be so prompt with making payments. They use it as a means of short term financing since they know vendors will tolerate it.

Under IFRS and US GAAP, loss recoveries are permitted as long as they aren't above historical cost. This means that if an asset's value decreases and then later increases back to its historical cost, the recovery of the loss can be recognized in financial statements. However, under IFRS and US GAAP, loss recoveries are not allowed for assets held-for-use. This means that if an asset is being used in the normal course of business, any loss recovery cannot be recognized in financial statements.

INVENTORY TURNOVER=COGS/AVERAGE INVENTORY
or. SALES/INVENTORY

Revenues are irrelevant. Remember that a low inventory turnover indicates poor sales and excess inventory. An inventory turnover ratio that's too high could indicate ineffective buying.

When the outcome of a project cannot be reliably estimated, IFRS requires the cost recovery method - revenue is recognized to the extent of contract costs and profit is only recognized at project completion.

regardless of whether it's interest paid or interest received, interest is classified as an OPERATING cash flow under US GAAP

Global Depository Receipts are not traded in US markets.

Remember, ADR's are issued by a US bank and represent shares of a foreign stock. ADR's trade on US exchanges and are denominated in US dollars.

The equity method is used when the investor can significantly influence the investee, typically with a 20%-50% ownership interest. This method allows the investor to account for its investment in the investee by recognizing its share of the investee's profits or losses in its own financial statements. It is commonly used when the investor has significant influence over the investee's operating and financial policies, but not control. The consolidation method, on the other hand, is used when the investor has control over the investee, typically with ownership interest of more than 50%. The choice between the two methods is not dependent on IFRS or US GAAP.

under US GAAP, interest is ALWAYS an OPERATING cash flow.

Available-for-sale securities are reported on the balance sheet at fair value, which means their current market value. However, any unrealized gains or losses on these securities are not immediately recognized on the income statement. Instead, they are reported as other comprehensive income, which is a separate section on the financial statements. This treatment allows investors and analysts to see the true value of the securities on the balance sheet while also providing transparency regarding any changes in value that have not yet been realized through a sale.

Under US GAAP, an asset is impaired if its carrying value is greater than the asset's undiscounted future cash flows. This means that if the asset's value on the balance sheet is higher than the expected cash flows it will generate in the future, it is considered impaired. This impairment is recognized by reducing the carrying value of the asset and recording a loss on the income statement. This is in contrast to IFRS, where the impairment test is based on the asset's recoverable amount, which is the higher of its fair value less costs to sell and its value in use.

IASB framework gives more emphasis to the importance of the accrual and going concern assumptions than the FASB framework does.

The correct answer is Consolidation Method. When an investor has greater than 50% ownership interest in an investee, they have control over the investee. In such cases, the Consolidation Method is used to account for the investment. This method involves combining the financial statements of the investor and the investee, as if they were one entity. It allows the investor to reflect their control over the investee and present a comprehensive view of the combined financials.

Remember that when it comes to inventory, US GAAP tends to be more conservative.

Under US GAAP, dividends paid are FINANCING cash flows!

Under US GAAP, an asset is impaired if its carrying value is greater than the asset's UNDISCOUNTED future cash flows. If impaired, the asset is written down to fair value. Subsequent recoveries are not allowed for assets held-for-use.

Under US GAAP, dividends PAID are FINANCING CASH FLOWS. Dividends received are operating cash flows.

Under IFRS, dividends paid can be reported as either operating or financing cash flows

Held-to-maturity securities are recognized on the balance sheet at AMORTIZED COST. Amortized cost is equal to the face (par) value less any unamortized discount or plus any unamortized premium.

Proportionate consolidation is NOT ALLOWED UNDER US GAAP

IFRS prefers Proportionate Consolidation in this case, but the equity method could also be used.

When a firm reporting under US GAAP cannot reliably estimate the outcome of a project, it must use the completed contract method. This method recognizes revenue and expenses only when the project is completed, rather than recognizing them over the course of the project. This is because the firm cannot accurately determine the financial impact of the project until it is finished. By using the completed contract method, the firm can avoid making unreliable estimates and ensure that the financial statements reflect the actual outcome of the project.

Under IFRS, interest paid can be reported as either operating or financing cash flows.

Global Depository Receipts are not traded in US markets.

Remember, ADR's are issued by a US bank and represent shares of a foreign stock. ADR's trade on US exchanges and are denominated in US dollars.

Under US GAAP, if an asset is impaired, it is written down to fair value. This means that the value of the impaired asset is adjusted to reflect its current market value. Fair value represents the price at which the asset could be sold in an orderly transaction between market participants. Writing down the asset to fair value ensures that the financial statements provide a more accurate representation of the asset's value, taking into consideration any decrease in its value due to impairment.

The counterparties do not exchange principal on an interest rate swap!!! Also remember, there is typically no margin deposit on IRS.